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Bullish sentiment among retail investors is back to recent highs as according to the closely watched American Association of individual investors survey. The widening gap between bullish and bearish sentiment suggesting investors are feeling a bit more confident once again. But our next guest warning that it could actually be contrary and bearish signal ahead of election year seasonality. Let's discuss that with Steven Suttmeier. He's chief equity technical strategist at Bank of America. It's great to have you here, Stephen, and let's talk about maybe what this does signal. Is it signaling weakness? And what should investors be preparing for at this point?

Sure, I mean, we did see, you know, a nice dip in in into early August, got people pretty bearish and then all of a sudden, two weeks later, back to being bullish again. So this increased sanguiness of individual investors based on the data you mentioned, is occurring ahead of a weaker seasonal period of September. So September, generally speaking, going back all, yeah, using every year, going back to 1928, it's the only month of the year that is up less than half the time. In fact, it's up about 44% of the time, negative return of negative 1.2% on average. Uh the difference between a normal year and an election year, presidential election year is, you tend to get a strong summer rally, which we've gotten this year, uh June, July, into August. And that typically sets up a little bit of of a pullback or consolidation in September and October. So you got marginally negative average returns, four negative 4 negative 0.46% average in September in election years, and negative 0.34 in October. So you have a little bit of a pause, a little bit of pullback, and that typically proceeds a rally into year end after the election, a relief rally.

So, right here, Stephen, just as SPX, um I just, what level should be, we should be watching here, resistance, support?

Yeah, you got it. I mean, I mean, the resistance is is at the old, at the high that we hit about a month ago, 5670. You also have another projected resistance just above 5700. We look at some tactical indicators that indicate exhaustion. We also noted that we did get a bearish reversal uh on a candle last last week as well. Um these these type of price projections near highs and near resistances do suggest that we dip. The big level right now is 5560. And guess what we did. We've held that already this this session. That's a big support. But I think given the weaker seasonality and the sentiment we mentioned, plus some of these tactical signs of exhaustion, suggest that we should break below 5560 and trend into the into the into the five uh 5500 range, maybe a little bit lower, maybe even 5300 or so. So, I mean, I think we're we're, you know, in for just a consolidation um over the next couple months that could take us 55, maybe 5300, maybe a touch below that.

Stephen, what are you seeing if we talk so much about the broadening out and maybe some of the other uh averages are getting a little bit more attention. I think of the Russell 2000 specifically and especially some of the game that we've seen just over the last couple of trading days. When you try to figure out that momentum and those key technical levels there, what are you noticing? And is it a different trend than what you're seeing from the broader S&P?

Um, I mean, we we've been, you know, we I mean, look, this is very interesting because um, you know, the S&P brushed against its old highs, but you look at the S&P equal weight, it did hit a new high. You look at the NYSE composite, did hit a new high, even though it shows some exhaustion. But specifically with the Russell 2000 or the IWM, which is the ETF a lot of people look at, um you had a breakout last month and you gave it right back. But the important thing to point out is we've held some chart support and and the rising 200 week moving average. Um right around 197 to 196. That is a big support for IWM. And I think as long as you can hold that, the potential is that that IWM can rally uh probably towards the uh the 226, 228 area. And if it can eventually surpass that, I mean, I'm not talking about maybe in the next couple of months, but if we if we have if we do get that year end rally on the election, we could be surpassing, you know, the 220s in route to like the old highs around 244 on IWM. So that would mean going back to about 2600 on the Russell 2000 index itself. So so still constructive on small caps, even though they got very choppy over the last uh over the last three to four weeks.

See uh Stephen, you know, we talked seasonality, we talked the election, and I'm also curious. What are sentiment indicators telling you right now, Stephen?

Well, I mean, when we look at, so so the the one indicator we've been focusing on is the uh spread between AAII bullish and AAII bearish sentiment. So that indicator got close to, you know, a a a marginally climactic level when the S&P corrected about 9.7% into early into early August, and it surged right back to the old old highs that we've seen over the last several months. So in terms of individual investor sentiment, it's a little bit stretched, meaning that you can get some of this seasonality. Um, you know, bear seasonality kicking in. The other factor, look at some of the put call, shorter dated put call ratios, you know, they went up uh as the market corrected and then they've gone back down, meaning more complacency in the market tactically speaking. So I think when you look at some of these tactical uh sentiment indicators, it is indeed supporting the case that the market may be somewhat exhausted here near resistances, and and poised to uh consolidate uh a bit lower into September, October.

Stephen, what are you seeing on the sector level? We talk a lot about it and even today, when you take a look at some of the selling that's happening within technology, we certainly did see a bit of a shift uh over the last couple of trading days. But some what what are some of the trends versus momentum that you're seeing there?

Sure. I mean, I think I think we've seen a nice rotation, and part of this rotation has driven market breadth higher, meaning advance decline lines have gone to new highs on the S&P, on the New York Stock Exchange, even on the Nasdaq 100, by the way, which does have a lot of those uh tech heavy names. But I would say you're seeing better rotation towards financials, for instance. A lot of technical patterns called big bases there. Big bases tend to be bullish patterns where stocks haven't moved in a while, and all of a sudden they start breaking out. We're seeing that in financials and banks. We're seeing it in selected industrials. Um, and I think those two sectors are the most notable of of sectors that are seeing um a benefit from the consolidation or the dip that some of the technology names, semiconductor names, uh some of the uh growthy discretionary names have seen.